Fiscal policy likely to remain expansionary in South Korea to offset economic slowdown

In the first quarter, the South Korean economic growth slowed to 2.8% on a year-on-year basis from Q4 2015’s 3.1% growth. Meanwhile, on a seasonally adjusted basis, the economy grew 0.5% in Q1, as compared with Q4 2015’s 0.7%. This signals a decelerating momentum of economic growth.

Delving into the data, the moderation was mainly because of subdued trade sectors and their spillovers to corporate investment, noted Commerzbank in a research report. Real exports growth saw just a slight change from previous quarter’s 2.5% growth. In the mean time, gross capital formation decelerated in the first quarter to 3.5%, as compared with the growth of 8% seen in Q4 2015. Moreover, private consumption growth surprisingly slowed to 2.1% in Q1 from 3.3% in Q4 2015.

Fiscal sector was the only bright spot. Government spending rose in the first quarter to 4.5% from 3.9% in the earlier quarter. This slightly underpinned the economic growth. With the government’s strong fiscal stance, the fiscal policy is expected to be proactive in the quarters to come, added Commerzbank. The South Korean economy is likely to expand 2.8% this year with risks skewed on the downside.

Even if headwinds continue to be there, the Bank of Korea seems to be hesitant to further cut the policy rate, but permit the exchange rate to have a crucial role. Furthermore, the BoK requires taking into account the pace of US rate normalization. The fiscal policy is expected to remain expansionary in the coming 12 months to offset an economic slowdown, according to Commerzbank.